Winners Curse Corrections Magnify Adverse Selection

The adverse-selection literature has only considered the case in which competing sellers costs of supply are independent and privately known by the individual sellers. In contrast, the auction literature has ignored adverse selection by implicitly assuming that a bid-taker is indi¤erent be-tween suppliers at a given price. We show that competition in auctions with common-value elements serves to magnify the impact of adverse se-lection, as a bidder supplying a higher-cost product rationally makes a heightened winners curse correction in a procurement auction. Hence lower-cost suppliers are disproportionately likely to win the auction, po-tentially creating a more serious quality problem for the procurer than mainstream adverse-selection models suggest.